S&P 500 ETF NEARS TEST OF FEBRUARY LOW -- RUSSELL 2000 ETF REMAINS ABOVE FEBRUARY LOW -- VIX SURGES TO FEAR LEVELS OF MARCH 2009 -- PUT-CALL RATIO SHOWS EXCESSIVE BEARISHNESS -- POTENTIAL DOUBLE TOPS IN MATERIALS SPDR AND METALS ETF
SPY NEARS FEBRUARY LOW FOR KEY TESTS... Link for todays video. At the risk of a lynching :~) , I will remain on a limb with my assessment of an uptrend on the weekly. This is important because an uptrend on the weekly chart implies that the April-May decline is a correction within a bigger uptrend. This correction may overstay its welcome and ultimately reverse the bigger uptrend, but the February lows have yet to be broken. Chart 1 shows the S&P 500 ETF (SPY) with 14-week RSI over the last three years. An uptrend ends with a support break and RSI move below 40. A downtrend ends with a resistance break and RSI move above 60. Using these criteria will not pick exact bottoms and tops. While it is not immune to whipsaws (false signals), it does adhere to the basic definition of an uptrend (higher highs/lows) and downtrend (lower lows/highs). A downtrend started with the breakdown in January 2008 and ended with the upside breakout in July 2009. The February low is the most recent reaction low and it marks key support at 104.15 (call it 104). With SPY trading around 106, key support is less than 2% away. RSI is currently just above 40. This is the make-or-break area for SPY. The weekly charts for DIA and QQQQ looks similar.
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Chart 1
IWM REMAINS WELL ABOVE FEBRUARY LOW... Chart 2 shows the Russell 2000 ETF (IWM) with weekly candlesticks over the last 15 months. First, there is a clear and present uptrend in place. Second, IWM is trading near the lower trendline of a rising price channel. Third, IWM is still well above its February low (over 9%). With IWM much further above its February low than SPY, small-caps are showing less weakness, which translates into relative strength. Small-caps are usually the ones showing relative weakness at a market top. Fourth, RSI is trading well above 50. The evidence suggests that IWM remains in an uptrend on the weekly chart. Again, the February low holds the key.
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Chart 2
VIX SURGES TO LEVELS NOT SEEN SINCE MARCH 2009... There was a time when the S&P 500 Volatility Index ($VIX) did not trend. Before the Lehman bankruptcy, the VIX was largely range bound (10-20) with spikes signaling excessive bearishness and extreme lows signaling complacency. While low readings were regarded as bearish, they did not always provide good signals because of the strong uptrend from 2003 until 2007. Chart 3 shows the VIX peaking near 90 with the panic of 08 and trending lower until the surge over the last three weeks. It is possible that a new uptrend is starting in volatility and this would be bearish for stocks. That is the long-term perspective. For the more immediate term (1-4 weeks), the huge spike in the VIX shows excessive fear that could foreshadow a bounce in the stock market. In fact, the VIX shows levels of fear that match March 2009, which is when the S&P 500 was below 700.
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Chart 3
PUT-CALL RATIO SHOWS EXCESSIVE BEARISHNESS... The CBOE Put/Call Ratio ($CPC) hit excessive bearish levels with the market plunge on 6-7 May and then took these readings to further excess this week. Chart 4 shows the Put-Call Ratio with its 10-day moving average in the bottom window. The put-call ratio is below 1 when there is more call volume than put volume. Put volume exceeds call volume when the ratio moves above 1. Surges above 1.25 signal abnormal put volume that shows excessive bearishness. The other indicator window shows the Percentage Price Oscillator (10,200,1) for the CBOE Put/Call Ratio (red line). Applying this indicator normalizes the put-call ratio and makes it easier identify excessive levels overtime. The PPO oscillated between -20% and +20% from April 2008 until April 2010 (two years). This weeks surge pushed the oscillator to its highest level since March 2007. A surge in the PPO signals a surge in put volume relative to call volume. This shows excessive bearishness that could set up a near term low.
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Chart 4
DOUBLE TOPS IN MATERIALS SPDR AND METALS ETF... The Materials SPDR (XLB) is one of the weakest sectors in the market right now. Its Bullish Percent Index is below 40% and the lowest of the nine sectors. Chart 5 shows XLB meeting resistance near the 62% retracement and forming a large double top over the last 6-7 months. With the April-May decline, the ETF is testing support from the February low. There are two equal highs around 35. The January high formed with a spike reversal, while the April high formed with a four week consolidation. Thomas Bulkowski, author of the Encyclopedia of Chart Patterns, calls this an Adam and Eve double top. Adam tops are spikes. Eve tops are flat. Traditional technical analysis asserts that the double top is confirmed with a break below the intermittent low. Classic measuring techniques would project further weakness towards 25. The height of the pattern is subtracted from the break for a target. Keep in mind that the pattern is not confirmed until there is a support break.
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Chart 5
Chart 6 shows the DB Base Metals ETF (DBB) with a double top as well. DBB exceeded the 62% retracement, but met resistance around 23-24 twice this year. The intermittent low marks support just above 18. I have also drawn three fan lines. DBB broke the first two and a bounce near current levels would argue for the third fan line. A break below this third line would be bearish. RSI is shown with a bearish divergence in the indicator window. Also notice that RSI moved below its February low and below 40. DBB is looking more bearish than XLB.
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Chart 6
XLE TRACES OUT BROADENING FORMATION ... Chart 7 shows the Energy SPDR (XLE) with a bearish broadening formation over the last 6-8 months. These formations show higher highs and lower lows, which reflect increasing volatility and uncertainty. The ETF moved above 55 in October 2009 and then embarked on a volatile range that got wider and wider - hence the broadening formation. Resistance in the low 60s is confirmed by broken support, the 50% retracement and this years reaction highs. The sharp decline over the last four weeks broke trendline support, but the broadening top has yet to be confirmed. A break below the February low would confirm the pattern and argue for further weakness in the coming months. As with XLB, SPY and others, the February low is the key level to watch in the coming days and weeks.
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Chart 7
Chart 8 shows the Oil Service HOLDRs (OIH) breaking below its February low with a sharp decline this week. As noted before, OIH is the volatile cousin of XLE. OIH met resistance near the 50% retracement mark with a rising consolidation. Even though these are rare for top formations, the support break at 110 sends a clear signal. Also notice that RSI broke below 40 for the first time since March 2009. After a 25 point (18+ percent) decline in four weeks, the ETF is short-term oversold and ripe for a bounce. The orange area shows a broken support zone around 110-115 that should act as resistance on any bounce.
